What Will be the Future Global Currency?

Since the end of WWII, the US dollar has been the world’s most prominent global currency. The vast majority of trade has been – and continues to be – conducted in US dollars and it remains the most widely held reserve currency in the world. But the lingering effects of the economic crisis on the US economy and its volatile state at present has sparked debate and discussion about whether or not the US dollar will retain its position as the world’s dominant currency.

The greenback has been America’s most successful export, but the dollar (like all other currencies) is supported by economic fundamentals such as GDP, employment rates, interest rates and levels of inflation. With the US economy bogged down in a recession, and the emerging status of a number of other currencies other thoughts and ideas regarding global currencies have emerged.

Currently, the world’s most dominant currencies are the US dollar, the Euro and the Japanese Yen (despite China’s rapid growth, the Chinese Yuan has a fixed exchange rate to the US dollar). Many people are suggesting that rather than the US dollar being replaced by another dominant reserve currency, the dominant global currency will be either regional or international in nature.

Emergence of regional currencies

The Euro – first introduced to the world’s financial markets on January 1 1999 – is the world’s only multinational currency. As international trade and globalisation increase, the creation of more multinational currencies has been suggested as a means of further facilitating international trade by reducing the need for currency exchange.

(When the Euro was launched, however, it was anticipated that it could become the alternative to the US dollar. While it had initial success and remains the second most held reserve currency in the world, the Euro is currently underperforming – the multinational currency creates multinational issues).

International reserve currencies

The US currency is the most widely held reserve currency in the world. Those who hold US dollar reserves, however, are concerned about the stability of their investment due to the current US economic position. Currently, for example, countries must purchase US dollars before they can purchase oil or a number of other commodities. But rather than another currency (national or regional) taking the place of the US dollar, it has been suggested that an international and global reserve currency be created that does not give an advantage to one currency over another when it comes to international trade.

In 2009, the Kremlin proposed the introduction of a supranational reserve currency that is monitored and controlled by an international body such as the International Monetary Fund (IMF). The proposal also highlighted the immediate need for more currencies listed as reserve currencies, and the implementation of systems to reduce the instability of exchange rates.

Shortly after, president of the People’s Bank of China Zhou Xiaochuan similarly called for an international reserve currency that would not be influenced by the fluctuations in different national currencies. The idea behind these proposals? Creating a more equitable currency.

The debate and discussion around reserve currencies, international trade and forex transactions highlights that the dominance of the US dollar and the limited number of reserve currencies is of growing international concern. Politicians and economists suggest, however, that any real transformation of currencies and international change may be a long way off.

For now, the US dollar remains the world’s most dominant currency – but whether it remains this way or whether proposals for an international reserve currency are actioned remains to be seen.

This information is brought to you by UKForex Foreign Exchange Services. It is not intended to constitute financial advice of any kind.

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